China equities Bin Shi says quality, valuation and discipline important in uncertainty

Bin Shi is buying more quality companies in China A equities after the correction. He believes the government has controlled risks well and was disciplined in stimulus measures and that is good for Chinese equities.

16 Apr 2021

You always want to buy high-quality companies. Even though you might not buy them at the perfect time, in the long run we believe that positions in those companies will work out.

In contrast, if you buy into lesser quality companies, the longer you hold them the more money you lose.

Bin Shi, Head of China equities

China equities – what is the market outlook for A-shares and H-shares in 2021? Markus Egloff, Head of Wholesale Asia, sat down with Bin Shi, Head of China Equities, for an hour-long chat to find out.

China equities update and market outlook 2021 – 10 key points

  1. China’s economy will grow 8.4% y-o-y in 2021, and 5.6% y-o-y in 2022, according to April 2021 estimates by the International Monetary Fund.
  2. China’s government is targeting stable growth, so future changes to monetary policy won’t be that drastic.
  3. Bin Shi feels that the Chinese government has done more to control risks than other more developed nations, which will make the Chinese economy healthier in the long run and create good prospects for China equities.
  4. China’s A-share markets have seen a correction, but Bin Shi sees more opportunities to buy into high quality companies and is comfortable to add to current holdings.
  5. New regulations on the after-school tutoring market will likely benefit leading companies because lower quality players will exit the market.
  6. Bin Shi believes that, despite hope and expectation around electric vehicles, the industry structure in China remains unstable and he is not willing to buy at high valuations at this point.
  7. Bin Shi remains positive on consumer, health care and financial services sectors.
  8. US embargoes have given China’s domestic semiconductor industry a huge boost and Bin Shi believes they are creating a huge competitor to the US semiconductor sector.
  9. Bin Shi believes it is likely we have seen the worst in terms of anti-trust penalties on Chinese tech companies.
  10. Chinese pharmaceutical companies' strong R&D skills mean they can compete with leading international competitors and Bin Shi remains positive on their long-term outlook.

Fireside chat with Bin Shi

Markus asked Bin a range of questions and we’ve grouped them in the categories below.

Click to head straight to the section that interests you.

Markus Egloff

Head of Wholesale Client Coverage Asia Pacific

Bin Shi’s macro views on China

Can you summarize briefly some of the key observations since we last spoke a year ago, and were you surprised by China’s rebound?

COVID-19 was definitely something new that the whole world needed to deal with, and it was hard to predict the duration and severity of the pandemic.

China has done a very good job in controlling the virus, but at a certain cost – people cannot travel outside China, and foreigners cannot travel in to the country without strict quarantine procedures. During the past year, China’s economy and companies proved their resilience and competitiveness.

Looking at the policy side, we have seen we have seen China’s top banking regulator saying he is concerned about the risks emerging from the financial markets. We have also seen the People’s Bank of China recently withdrawing some liquidity from the market. The big question remains - is China about to introduce policy tightening, like we saw in 2017/2018 with the deleveraging campaign?

I think the overall policy was extremely stimulative last year to really battle the COVID-19 outbreak, so since things are back to normal there is no need to stimulate the economy that significantly.

The Chinese government is targeting stable growth, so the withdrawal of liquidity probably won’t be that drastic.

As for the comments from Governor Guo Shuqing, it’s his job to warn of potential risks within the financial system and within the property sector. If risks in these areas are left unchecked, it could lead to a potential crisis.

But compared to a lot of major economies, China has done a good job in terms of controlling risks within the financial and property sectors, and we feel pretty comfortable with the overall situation. 

We feel that the Chinese government has done more to control risks and been more disciplined in terms of the size of stimulus measures, and we think that will make the Chinese economy healthier in the long run, and that is good for prospects for Chinese equities.

China credit impluse (YoY Growth/%), Jan 2011-Jan 2021

Source: Bloomberg, WIND, As of Feb 2021

Is China reversing its steps to open up to foreign investors?

I don’t think China is reversing its policies, if anything the government has opened up the door a lot more, such as allowing foreign companies 100% ownership within industries like insurance and asset management.

I think the Chinese government realizes that foreign expertise actually benefits the long-run growth of the economy, so I don’t think they are about to reverse their open-door policy.


Bin Shi on China A shares, markets and IPOs

Turning to markets in particular, volatility has risen and the A-share market has pulled back – do you expect the recent current market correction to continue?

So far this year, the rapid rise and subsequent decline in the A-share market has been pretty dramatic.

We think that some of the rise wasn’t really supported by fundamentals, and was rather supported by liquidity and higher subscription to mutual funds, which then had to deploy quite quickly.

Following the decline, I think expectations are much more realistic now and the mood is probably more rational.

After the correction, we actually see more and more opportunities to buy into high quality companies and we feel more comfortable to add to our holdings at this point.

You have mentioned the growing presence of longer-term institutional investors in the A-share markets – does this mean reduced potential to generate alpha in the future, and where do you look to find the new rising stars?

Institutional investors’ participation in the China A-share market has definitely been going up, from both foreign and domestic sources. We do expect the China A-share market will become more efficient, as we expect participating investors will be more sophisticated.

But that doesn’t mean alpha opportunities will disappear. If we keep improving our investment capability, we can continue to deliver alpha. If you look at our offshore products, based in markets with higher institutional presence than in the China A-share space, we have delivered strong alpha over the years as well.

Which sector in the A-share market do you think is most attractive right now, and what’s your view on the electric vehicle (EV) sector?

We continue to be very positive on the consumer, healthcare and - to some extent - financial services sectors.

In those sectors, we continue to see a lot of changes and believe that industry structures are more stable. That means the leaders we identify are so far ahead of their competitors and will most likely continue to do well, so we can invest in them for the long term.

For the EV space, at this moment we don’t have any exposure.

It's not because we don’t believe in EV in the future, we do believe they will eventually replace gas engine vehicles down the road.

However, the industry structure at this point is very unstable, with a lot of existing, young, and brand-new players in the market. 

So at this point we think that while there is a lot of hope and expectation around EVs, the industry structure remains unstable and we think it will take some time for the dust to settle.

As such, we are not will to pay the high valuations at this point. 

If we can see a company stand out significantly from their competitors, we’ll pay attention to them. At this point there are a lot of Chinese EV players, but in terms of technology and product sophistication Tesla is probably still leading the pack at this point.

It has been a strong year for IPOs, especially in Hong Kong – what are the driving forces for this?

Usually, a strong market will lead to more IPOs.

But when we look at the IPO market, we need to focus on two things. One is quality and the other is valuation.

Usually, in the early stage of a bull market, quality is good and valuations are sensible.

In later stages, the quality is usually less good and valuations higher because people have unrealistic expectations.

So I think at the later stage we need to be more careful and disciplined and look at all companies on a case-by-case basis.

Overall, we have participated in fewer names, but if the right company comes out at the right valuation, we will be more than happy to participate.

We have seen a lot of Southbound capital flow into Hong Kong. Can you explain why and tell us whether you expect it to continue?

This again shows that domestic investors are still not very long-term and that they tend to chase after performance.

The valuation discount between A-shares and H-shares has existed for some time. Last year, we saw a significant inflow into Southbound channels, reaching a peak in January 2021. However, since then it has slowed, mainly due to a market correction.

I think this demonstrates something unique about both the China A-share market and domestic investors.

Cumulative net buying of Southbound/Northbound Connect since inception (USD bn)

Source: Wind, Goldman Sachs Global Investment research, as of January 2021

Basically, strong performance tends to lead to strong inflows, and once the market starts to correct the inflows will disappear, and it will take time for the market to consolidate. Additionally, performance can pick up in a very short time frame. Even though we hope that performance can sustain in a more balanced way, it actually comes in spurts.

This again shows that we have to focus on the long-term, instead of being distracted by some hard-to-predict flows.

We think over the long-term flows will continue since the allocation of total savings in China to equity markets remain low. If you look at equity market valuations and investment prospects for other assets, say fixed income, we think the equity market continues to be quite attractive from a long-term perspective.


Tech, semi-conductors and anti-trust regulations

The Chinese government appears to be taking a tough stance on anti-trust regulations – what impact do you see for large players like Alibaba and Tencent?

To put it precisely, anti-trust law has existed in China for quite a long time and it has only been strongly enforced recently.

I think it is a fact that a lot of the platform companies have become so big that they have a huge influence on their industry, the economy and their competitors.
So there is a need for standard procedures to deal with anti-competitive behavior from the platform companies, and that’s what this is all about.

When the Chinese government handed out the Alibaba penalty, they actually emphasized the benefit of platform companies and their positive impact.

So I think the government’s objective is not to kill the platform companies but to deal with some of the negative impacts from them becoming so large.

Turning to tensions between US and China, is the global semiconductor shortage an opportunity for China?

The shortage has happened for a few reasons, not just the conflict between US and China.

Firstly, the growth of 5G, particularly 5G handset networks, means the demand for semiconductor components is growing. 

Secondly, because of the economic uncertainty caused by COVID-19, many companies were not sure about how far the economy would slow, and so held back on capex investments. 

The subsequent recovery has been stronger than many people expected, so that’s why all-of-a-sudden we are facing industry shortages that we have never seen before – even during the boom years. The shortages we are seeing will probably last for another year

Turning to the Chinese semiconductor industry, it has actually benefited tremendously from tensions between the US and China. 

In the past, a lot of leading Chinese tech companies relied on US-made semiconductor components. Embargoes enforced by the US have pushed these companies to find alternative semiconductor sources, and that’s given the domestic semiconductor industry a huge boost. 

Now we are seeing many domestic semiconductor companies reporting triple-digit growth, and that would have been impossible without the conflict.
So, in the short-term, the US embargo created some pain for Chinese companies but, I believe that in the long-term, it will be extremely detrimental to the semiconductor industry in the US because it is creating a huge competitor.

Have anti-trust risks for China’s tech sector been appropriately priced in, and do you expect this theme to be an evolving story over the next 12-18 months?

I think we have seen the worst in terms of anti-trust penalties. 

Alibaba was the first to be identified, and they actually had some anti-competitive behavior in written format, so that’s perhaps why they received the stiffest penalty. Other companies may have some anti-competitive behaviour in their practices, but most likely not to the same degree as Alibaba.


Portfolio matters and cash strategy

Given recent market trends, how have you managed risk since 2020 and how have your strategies evolved since then?

For us, we focus on the long term, and also on the quality of companies. We feel that’s the best way to manage risk in the long run, no matter if it a strong market or a weak market.

You always want to buy high-quality companies. Even though you might not buy them at the perfect time, in the long run we believe that positions in those companies will work out. In contrast, we believe that if you buy into lesser quality companies, the longer you hold them the more money you lose.

Obviously you need to make some changes from time to time - in bull markets even high-quality companies can get overpriced - but we try to be consistent with our focus.

For example, there have recently been a lot of IPOs, but in many cases even though we recognized some high-quality companies, we felt the expectations and valuations were unrealistic and quite detached from reality, so we took some profit on those names.

We have also kept some cash until we can identify reasonably priced high-quality companies. Our cash levels may have hurt us last year, but this year they have helped us, to some extent.

What is your thinking around cash now? We note that your China onshore strategy is under 5% but the China offshore portfolio is over 10% cash. What does that tell us about how you’re viewing both markets?

Our cash levels are not really a market timing tool, they are really a result of investing with discipline.

Lower cash levels in the onshore strategy mean we feel more comfortable at this point to either add to our recent holdings or buy some of the high-quality names.

As for our offshore strategy, if ADRs correct, most likely our cash levels will go down.

A key determining factor is: if we buy these companies today, can we expect a reasonable return over two-to-three years? If we feel we can, then we should buy them because trying to predict the next upturn is very hard to do.

How are your portfolios positioned right now, and what are some of the notable changes you’ve made recently?

We have always positioned ourselves for long-term capital appreciation but obviously macro dynamics are different under different circumstances. So we made some adjustments, but we haven’t really deviated much from our core approach.

In terms of changes we have made, probably at times of uncertainty and market weakness I think it is more important to focus on quality, valuation, and discipline.

So, in terms of changes made, we have taken profits in some of the IPOs and stocks that have done extremely well, but we think that fundamentals need some time to catch up. We have also invested more in quality names in some less glamorous sectors, such as the more innovative banks in the financial services space.

You mention that ‘boots-on-the-ground’ research is a key part of your process, have COVID-19 controls and travel limits affected this? If so, how have you responded?

Travelling is more difficult, which makes our due diligence work more difficult, but we have followed many of the sectors we focus on for a very long time and established a lot of industry contacts, who help us to track trends in China.

We also have people based in Shanghai, and our analysts in Hong Kong have travelled to mainland China and gone through quarantine processes in order to do necessary due diligence work. In all, we have to get the job done and we have to have strong convictions in companies before we deploy our investments.

So while COVID-19 has had some impact, overall it has been quite minor on our research approach.

Can you talk about ESG as part of your investment process?

Actually, ESG has been a very important part of our investment process for a very long time. We are long-term investors, so we tend to focus on the factors that decide the long-term success of a company.

Our focus on quality has an ESG element to it, such as corporate disclosure, quality of governance, and whether the company is environmentally friendly, and these have been elements of our process - well before ESG has become everybody’s buzzword.

The attention on ESG has been helpful for our work too. In the past there were few resources available, such as external databases.

Now there are a lot more resources available that actually make our assessments easier than before. At UBS Asset Management we also have a separate ESG team that look at all the holdings we have to assess if they meet our standards or not.

One thing to emphasize though is that business practice in China is quite different to other more developed markets, so sometimes you have to take into account some of the local factors in order to come to the right conclusion on the ESG front.

China’s birth rate has really slowed, how does this impact your view on the consumer sector?

That’s an excellent question. If consumer sector companies focus on quantity, they will have a tough time because population growth has slowed down significantly. 

However, most of the companies we invest in really only focus on quality, such as growing demand for premium goods. 

Despite COVID-19, those kinds of companies have seen demand continue to pick up. Take premium liquor companies for example, the top ones are actually seeing a shortage of supply, since demand continues to grow for their premium products.

Ten years ago, investors were probably focused on whether companies can get the largest market share. Nowadays, its all about quality and which segment companies are in, and you don’t just bet on companies that are focused on the size of the industry anymore, because the growth rate of the industry will probably slow down because of population issues.

How do you price-in political risk, if at all?

It’s hard to do, actually, and political risk is part of life when investing in China. The best thing for us to do is to invest in a diversified way and in quality companies.

China has always been in the front with new business models, have you found any new and exciting trends with the companies you have been looking at?

When we talk to both public and private companies we actually get quite excited because we feel that many are doing new and interesting things that will enable them to do very well down the road, not only in China but also internationally too. 

Take Chinese pharmaceutical companies for example. 

In the past, most of them licensed products from leading companies in the US or Europe to sell in China. Now, we are seeing more and more Chinese pharmaceutical companies license out their products because they can do their R&D faster, cheaper, and more efficiently than international competitors. As Chinese companies become more innovative and competitive, we might see more cases like that down the road.

More insights

Subscribe now

Perspectives matter. Tune in to our insights.


Singapore Retail Investors

PLEASE READ THESE TERMS AND CONDITIONS CAREFULLY BEFORE PROCEEDING. BY UTILIZING THE WEBSITE AND PAGES THEREOF LOCATED AT WWW.UBS.COM/AM-SG ("WEBSITE"), YOU ACKNOWLEDGE THAT YOU HAVE READ THESE TERMS AS WELL AS THE GLOBAL TERMS OF USE(collectively "TERMS") AND THAT YOU AGREE TO BE BOUND BY THEM. IF YOU DO NOT AGREE TO ALL OF THE TERMS OF THIS AGREEMENT, YOU ARE NOT AN AUTHORIZED USER OF THESE SERVICES AND YOU SHOULD NOT USE THIS WEBSITE.

This website is not intended for and should not be accessed by persons located or resident in any jurisdiction where (by reason of that person's nationality, domicile, residence or otherwise) the publication or availability of this website is prohibited or contrary to local law or regulation or would subject any UBS entity to any registration or licensing requirements in such jurisdictions. It is your responsibility to be aware of, to obtain all relevant regulatory approvals, licenses, verifications and/or registrations under, and to observe all applicable laws and regulations of any relevant jurisdiction in connection with your entrance to this website. Each investment product and service referred to on this website is intended to be made available only to residents in Singapore.

UBS reserves the right to change, modify, add or remove content on the website as well as these terms at any time for any reason without notice. Such changes shall be effective immediately upon posting. You acknowledge that by accessing our website after we have posted changes to these terms, you are agreeing to these terms as modified.

The materials on this Website are distributed by UBS Asset Management (Singapore) Ltd (company registration number: 199308367C), which is licensed by Monetary Authority of Singapore ("MAS") in Singapore pursuant to the Securities and Futures Act (Chapter 289 of Singapore). UBS Asset Management (Singapore) Ltd is part of the Asset Management business division of UBS Group AG. UBS Asset Management (Singapore) Ltd together with UBS Group AG and its group companies shall collectively be referred to as "UBS".

The information contained in this Website has been prepared and is intended for general circulation. The information does not constitute advice and does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. The investment services or products referred to in this Website may not be suitable for all investors. UBS recommends that you independently evaluate particular investments and strategies and seek independent advice from a financial adviser regarding the suitability of such investment products, taking into account your specific investment objectives, financial situation and particular needs, before making a commitment to purchase any investment products. Investment involves risks. You should be aware that investments may increase or decrease in value and that past performance is not indicative of future performance.

The information contained in this Website is not an offer to buy or sell or the solicitation of an offer to buy or sell any investment product or to participate in any particular trading strategy. UBS, its officers and/or employees may have interests in any of the investment products referred to on this Website by acting in various roles. UBS, its officers and/or employees may receive fees, commissions or other benefits for acting in those capacities. In addition, UBS, its officers and/or employees may buy or sell investment products as principal or agent and may effect transactions which are not consistent with the information set out in this Website.

You fully understand and agree that, by making available this Website, UBS should not be construed as making: (a) any endorsement of any investment product referred to in this Website; (b) any representation that UBS has performed any due diligence on any investment product referred to in this Website; or (c) any representation that the information in this Website is complete, accurate, clear, fair and not misleading. The use or reliance on any such information contained in this Website is at your own risk and any losses which may be suffered as a result of you entering into any investment are for your account and UBS shall not be liable for any losses arising from or incurred by you in connection therewith. UBS is not responsible or liable for the accuracy and completeness of any such information or the performance or outcome of any investment made by you after receipt of such information, irrespective of whether such information was provided at your request.

Using, copying, redistributing or republishing any part of this Website without prior written permission from UBS is prohibited. Any statements made regarding investment performance objectives, risk and/or return targets shall not constitute a representation or warranty that such objectives or expectations will be achieved or risks are fully disclosed. The information and opinions contained in this Website is based upon information obtained from sources believed to be reliable and in good faith but no responsibility is accepted for any misrepresentation, errors or omissions. All such information and opinions are subject to change without notice. A number of comments in this Website are based on current expectations and are considered “forward-looking statements”. Actual future results may prove to be different from expectations and any unforeseen risk or event may arise in the future. The opinions expressed are a reflection of UBS’s judgment at the time this document is compiled and any obligation to update or alter forward-looking statements as a result of new information, future events, or otherwise is disclaimed.

UBS does not hold out any of its officers and/or employees as having any authority to advise you, and UBS does not purport to advise you on any investment product. Any investment will be made at your sole risk and UBS is not and shall not, in any manner, be liable or responsible for the consequences of any investment.

This Website and its contents are provided on an “as is” and “as available” basis. UBS does not warrant: (a) the accuracy, timeliness, adequacy commercial value or completeness of this Website or its contents, and expressly disclaims any liability for errors, delays or omissions in the contents, or for any action taken in reliance on the contents; (b) that your use of and/or access to this Website or its contents, will be uninterrupted, timely, secure or free from errors or that any identified defect will be corrected; (c) that this Website or any content will meet your requirements or are free from any virus or other malicious, destructive or corrupting code, agent, program or macros; (d) that any information, instructions or communications posted or transmitted by you through this Website is secure and cannot be accessed by unauthorised third parties; and (e) that use of the contents in this Website by you will not infringe the rights of any third parties. No warranty of any kind, implied, express or statutory, including but not limited to the warranties of non-infringement of third party rights, title, merchantability, satisfactory quality or fitness for a particular purpose and freedom from computer virus or other malicious, destructive or corrupting code, agent, program or macros, is given in conjunction with this Website.

You hereby agree to indemnify UBS and any of its officers, employees or agents against, and to keep UBS and any of its officers, employees or agents harmless from, any claims (actual and threatened), settlement sums, liability, loss, damages, costs (including solicitor and client costs and expenses (legal or otherwise)), charges, expenses, actions, proceedings, whether foreseeable or not which we may sustain, suffer or incur, directly or indirectly out of or in the course of or in connection with any the following: (a) any use of this Website or the contents by you, or any part thereof; (b) UBS having made available the Website; (c) any breach of these Terms by you, however arising; or (d) any negligence, act or omission, wilful default, unlawful act, fraud and/or misconduct on your part or violation of any rights of another person or entity by you.

The funds referred to in this Website have been authorised or recognised by the MAS for sale to the public in Singapore (the “Funds”). Copies of the registered Singapore prospectuses ("Prospectuses") referred to in this Website have been lodged with and registered by the MAS. The MAS assumes no responsibility for the contents of the Prospectuses. The registration of the Prospectuses by the MAS does not imply that the SFA or any other legal or regulatory requirements have been complied with.

MAS registration is not a recommendation or endorsement of a Fund nor does it guarantee the commercial merits or performance of such Fund. It does not mean that a Fund is suitable for all investors nor is it an endorsement of its suitability for any particular investor or class of investors. UBS Asset Management (Singapore) Ltd has been appointed as the representative for the Funds in Singapore for the purposes of performing administrative and other related functions relating to the offer of Shares under Section 287 of the Securities and Futures Act, Chapter 289 of Singapore (the "SFA") and such other functions as the MAS may prescribe.

You may not assign your rights under the Terms without our prior written consent. UBS Asset Management (Singapore) Ltd may assign our rights under the Terms to any third party.

No person or entity who is not a party to the Terms shall have any right under the Contracts (Rights of Third Parties) Act, Chapter 53B of Singapore or other similar laws to enforce any term of the Terms regardless of whether such person or entity has been identified by name, as a member of a class or as answering a particular description. For the avoidance of doubt, this shall not affect the rights of any permitted assignee or transferee of the Terms.

These Terms shall be governed by, and shall be construed in accordance with, the laws of Singapore. The courts of Singapore shall have exclusive jurisdiction to hear and determine any suit, action or proceeding, and to settle any disputes, which may arise out of or in connection with these Terms and, for such purposes, you agree to submit  to the jurisdiction of the courts of Singapore. Each party hereby waives any objection which it might at any time have to the courts of Singapore being nominated as the forum to hear and determine any proceedings and to settle any disputes and agrees not to claim that the courts of Singapore are not a convenient or appropriate forum.

© UBS 2021 - the key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

Reset